MongoDB Has Monster Potential and There’s Still Time to Grab MDB Stock

There's a good reason MDB stock has risen by five-fold over the past 18 months

Say hello to MongoDB (NASDAQ:MDB). The company behind the world’s most used modern database platform went public in late 2017 at a price of $24 per share. MDB stock popped on its first day on Wall Street, and it’s been nothing but up, up, and away since then.

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Most recently, MongoDB reported monster fourth quarter numbers which smashed analyst estimates and included above consensus revenue and profit guides for both next quarter and next year. MDB soared more than 25% in response to all time highs in excess of $130. That means the stock has risen by more than five-fold over the past year and a half.

Is this rally sustainable? Or is MDB stock just in a prolonged Wall Street honeymoon phase that’s due to end soon?

I think the former. In the big picture, MongoDB is a monster growth company with a unique, interesting, and necessary solution aimed at disrupting the multi-billion dollar software database market.

Secular trends are favorable, the company is growing rapidly, the market opportunity is huge, gross margins are high, the business model is attractive, and the long term profit potential is enormous.

All in all, MongoDB has all the characteristics of a monster growth stock. The only question, then, is valuation. At $130, the valuation is not stretched enough to unhinge this rally or detract from the long term bull thesis. As such, I think this stock will keep rallying for the foreseeable future, and that any and all big dips should be seen as buying opportunities into a really strong stock.

The Fundamentals Are Very Strong

MongoDB is a very technical company. Specifically, MongoDB is a general purpose, distributed database platform that combines non-relational and relational database architectures to improve performance, scalability, flexibility, and reliability of software databases.

That’s a mouthful. But, the idea isn’t too hard to understand.

Essentially, at the heart of every software application is a database, which is used to store, organize, and process data. Traditionally, these databases were relational, or row-based, since old school data was almost always structured in a row-column manner.

Recently, though, technological advancements and a boom in data volume have created a surge in the amount of non-relational, or document-based, data in the world. Companies need to store, organize, and process this data, too, but relational databases have shortcomings in doing so.

Thus, over the past several years, there has been a surge in NoSQL, or non-relational, databases. MongoDB is one of these databases. But, the platform is unique in that it takes the best parts of relational databases, combines them with the reduced rigidity inherent to non-relational databases, and delivers a hybrid database platform built for the modern world.

Beyond this core narrative, there are a few trends working in MongoDB’s favor. First, every company is becoming a tech company, and deploying software applications. Second, every company is starting to use data in increasing frequency to make business decisions. Third, most companies are pivoting to the cloud, a transition that forces them to re-evaluate their database platforms.

Given all this, it should be no surprise that MongoDB is growing by leaps and bounds. The customer base grew by 130% last year, and those customers are increasingly spending big money on the platform. Revenue growth has been running in the 50%-plus range for several consecutive quarters.

Yet, revenues are still expected at just $370 million next year. The global software database market is nearing $60 billion. Thus, so long as MongoDB continues to win share through its hybrid-derived advantages, this company will remain on a big growth trajectory.

Valuation Is Stretched, but Not Too Much

Given the company’s robust fundamental growth narrative and secular tailwinds, it’s fair to say at this point in time that MongoDB projects as a big growth company for the foreseeable future. Big growth companies are usually accompanied by high flying stocks, so long as the valuation remains reasonable. Thus, the question of where MDB stock goes next hinges on valuation.

Right now, the valuation on MDB is stretched. The company now has a $7 billion market cap. Sales next year are expected around $370 million. That means MDB stock is trading at nearly 20-times forward sales.

That’s a big multiple. Even for a hyper-growth software company. Two of my favorite hyper-growth software stocks, Shopify (NYSE:SHOP) and The Trade Desk (NASDAQ:TTD), trade at 15-times forward sales, and those sales multiples are about as big as it gets in this sector. Consequently, it’s fair to say that the valuation on MDB is stretched here and now, but I don’t think it is fundamentally unsupported.

If you take a long term view on MDB, it’s easy to see that this company projects as 20%-plus revenue grower for the next decade-plus as increasing data volume and variety amplify the need for hybrid database platforms. Gross margins are sky high above 70%. Opex rates are falling with scale, and could reasonably trend towards 40-50%.

As such, at scale, this will be a multi-billion dollar revenue company with 20%-plus operating margins. Under those assumptions, my modeling suggests that this could one day be a billion dollar profit company. Based on a software average 30 forward multiple, that equates to a $30 billion market cap one day.

In other words, MDB has lot of runway left. So long as the numbers remain strong and support the long term bull thesis, the stock will remain on a winning trajectory.

Bottom Line on MDB Stock

I wouldn’t chase the rally in MDB stock here. But, this is a monster growth stock supported by very strong secular tailwinds and robust growth rates. Thus, any big pullback from all time highs should be viewed as a long term buying opportunity.

As of this writing, Luke Lango was long SHOP and TTD, and may initiate a long position in MDB within the next 72 hours.